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(10 points) Sabino Equipment, Inc., expects to earn $10 million per year in perp

ID: 1170361 • Letter: #

Question

(10 points) Sabino Equipment, Inc., expects to earn $10 million per year in perpetuity if it undertakes no new investment opportunities. There are 1,000,000 shares of stock outstanding. The firm will have an opportunity at Date 1 to spend $5 milion on a new product. The new product will increase earnings in every subsequent period by $750,000 This is a 15 percent return per year on the project. The firm's discount rate is 10 percent. What is the value per share before and after deciding to accept the new product?

Explanation / Answer

value of firm before investing into project

earning/discount rate

100000000

value of project

earning/discount rate

7500000

total value of firm after the project

107500000

value of share before project

100000000/1000000

100

no of share after financing the project

(100000000+5000000)/100

1050000

value of share after project

107500000/1050000

102.38

value of firm before investing into project

earning/discount rate

100000000

value of project

earning/discount rate

7500000

total value of firm after the project

107500000

value of share before project

100000000/1000000

100

no of share after financing the project

(100000000+5000000)/100

1050000

value of share after project

107500000/1050000

102.38